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US Fed signals rate rise in 2015

Peter RyanUpdated
Thu 20 Mar 2014, 8:50 AM AEDT

Business editor Peter Ryan says the US Federal Reserve dropped America's jobless rate as the yardstick for gauging the economic recovery. The Fed has cut its asset purchase program by another $US10 billion to $US55 billion a month. Stocks were sold off when the statement appeared to signal that US interest rates could begin to rise in 2015. The Australian dollar fell one US cent on the news.

Transcript

CHRIS UHLMANN: The US Federal Reserve has signalled that America's record low interest rates could start rising next year if the economic recovery continues.

In her first major decision as head of the world's most powerful central bank, Janet Yellen also dropped America's unemployment rate as the yardstick for rates rising from their near zero level.

With more I'm joined by our business editor, Peter Ryan. And Peter, we're now more than five years after the collapse of Lehman Brothers, so is this a sign that the US recovery is finally taking hold?

PETER RYAN: Well, Chris, it does appear the worst is over which is why the Fed has cut its asset buying or money printing program by another $10 billion to $55 billion a month. Remember this time last year it was running at a massive $85 billion.

Now this is a sign that the Fed is more confident that the US economy can get off this drip feed of cheap and easy money but this is going to be a gradual process rather than financial cold turkey.

The other sign is that the US unemployment rate is falling faster than expected so the Fed has overhauled its guidance by removing 6.5 per cent as a jobless rate as the threshold for any rate increase.

The Fed is now looking at other factors but the big one is inflation, which Janet Yellen wants to get back above 2 per cent - it's currently just 1.2 per cent.

And this morning Janet Yellen was under pressure to nominate just when the key US interest rate would start rising once the Fed's asset purchase program was fully shut down.

JANET YELLEN: It's hard to define but probably means something on the order of around six months or that type of thing. But, you know, it depends what conditions are like. We need to see where the labour market is, how close are we to our full employment goal. That will be a complicated assessment not just based on a single statistic.

If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 per cent objective, that is a very good reason to hold the funds rate at its present range for longer.

CHRIS UHLMANN: The chair of the US Federal Reserve, Janet Yellen.

And how did the Australian dollar react to the news?

PETER RYAN: Well, when the positive news hit, the US dollar surged. That saw the Australian dollar fall one US cent to a low of 90.2 US cents.

Now Wall Street initially fell a quarter of 1 per cent on the signal that US rates might start rising next year but investors were a bit more relaxed when they read the Fed's fine print for higher rates.

CHRIS UHLMANN: Briefly, Janet Yellen was asked about the crisis in Ukraine. Does she have any concerns about US or global exposure?

PETER RYAN: Well, Chris, Ms Yellen said the Fed is monitoring the situation very closely but doesn't see any global financial repercussions at the moment. However, she said that while America's exposure is not major, the crisis would certainly be on the Fed's radar if the situation escalated in any way.